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Mercedes now weak link in DCX chain; chairman's dream to be No. 1 in jeopardy

JENS MEINERS | Automotive News Europe

Posted Date: 4/26/05

STUTTGART - Ten years after it began, Chairman Juergen Schrempp's effort to turn DaimlerChrysler AG into the world's No. 1 automaker is in trouble. But it's not Schrempp's add-ons that are foundering. It's the Mercedes-Benz crown jewel that has problems.

Critics say DaimlerChrysler should shed its vast structure and return to being Daimler-Benz. They challenge the ability of the company's managers to handle so many brands on a global scale.

Shareholders easily confirmed Schrempp's post at the April 6 annual meeting here, but professional fund managers joined a large faction of individual investors in criticizing the company's financial performance.

"One cylinder always seems to be working poorly," said Thomas Meier, fund manager at Union Investment in Germany.

DWS Investment fund manager Klaus Kaldemorgen mocked the company's method of fixing problems: "First you shoot yourself in the knee, and then you call the doctor."

Schrempp defends the performance of his company, which earned 2.5 billion euros, or about $3.23 billion at current exchange rates, in 2004 on sales of 142.1 billion euros.

In an interview with the German weekly Der Spiegel, Schrempp said that DaimlerChrysler "clearly" boosted profits in 2004, and that its balance sheet is "totally healthy."

"When you look at 2004 objectively, we developed well," he said.

Schrempp said the commercial vehicle division had the best result in its history. Financial services did extremely well, he said, and Chrysler boosted earnings by about $2.47 billion.

"Mercedes-Benz may not have its usual strength, but with an operating profit of 1.7 billion euros," or about $2.21 billion, he said, Mercedes is "still generating a result that pays back the cost of capital."

Global vision

Schrempp had envisioned adding North American and Asian legs to its Mercedes stronghold in Europe to build an empire with leadership in all three main global markets. With financial services and commercial vehicles, it was supposed to propel DaimlerChrysler past General Motors, Toyota Motor Corp. and Ford Motor Co.

By 2000, DaimlerChrysler had acquired Chrysler Corp. and purchased 37.3 percent of Japan's Mitsubishi Motors Corp. and 10.5 percent of Korean automaker Hyundai Motor Co. Revenue and profits that year were the highest in Schrempp's tenure.

Officially, Schrempp hasn't given up his vision. Last year he reconfirmed his goal to become the world's largest carmaker.

But after selling its equity positions in Mitsubishi and Hyundai, DaimlerChrysler no longer has an Asian leg in its global strategy.

This year other problems are more immediate, especially in the core Mercedes Car Group.

The ultraluxury Maybach brand is selling at half the expected volume.

DaimlerChrysler won't kill the entry-level Smart brand, but it will halt production of the Smart Roadster this year, and the Smart ForFour SUV is dead.

Quality slippage

The vaunted quality of Mercedes cars has fallen sharply, and so have global sales.

The quality issue surfaced first in various quality surveys and after the launch of the technically advanced E class in 2003. It then was reflected in slipping positions in customer-satisfaction polls.

Last summer DaimlerChrysler recalled 680,000 vehicles to fix the complex SBC electrohydraulic braking system. This month it had to recall 1.3 million vehicles to fix electronics and more braking problems - more than a year's total production.

"If you ask premium prices, you have to deliver premium quality," said Union Investment's Meier. In a recent Consumer Reports U.S. subscriber survey, the 2004 Mercedes-Benz E class was the most problem-ridden car. Among 2001 models, the C class was the worst car and the M class the worst SUV.

But the problems extend to Smart and Maybach. Smart, which has never been profitable and which DaimlerChrysler considered closing, will undergo a turnaround strategy that will cost $1.56 billion. Schrempp now promises the brand will break even in 2007, with a lineup reduced to the two-seat ForTwo and the larger ForFour model.

"Smart will be integrated where it makes sense, in areas such as aftersales and back office," said spokesman Heinz Gottwick. He said the company still is working on the full plan, which will be disclosed at the end of this month.

Analysts expect sharp cuts at Smart.

"Smart may be reduced to two model lines, integrated into the Mercedes-Benz structure instead of a separately run brand," one analyst said. "The question is what (Smart President) Ulrich Walker will do if he is turned into the equivalent of an A-Class or E-Class director."

Maybach sold 500 cars last year, just half of the 1,000 units it expected to sell annually.

Mercedes' partnership with British racing car specialist McLaren has cooled down. Mercedes car group CEO Eckhard Cordes killed the P8 project for a sister model to the SLR supercar. McLaren is continuing on its own.

The Chrysler group turned a profit in 2004, but it may be too soon to call it a turnaround success. Like with the PT Cruiser some years ago, Chrysler has a hit with the Chrysler 300 and Dodge Magnum. But its next-generation small and mid-sized cars, expected to be more conservative, may lose momentum.

Calling for patience

DaimlerChrysler's Asian strategy is in limbo after it divorced Mitsubishi and sold its shares in Hyundai last year. Privately, some Hyundai executives are glad DaimlerChrysler pulled out.

"DaimlerChrysler was not very successful with Chrysler and their other ventures," one said. "We certainly did not want to be pulled down that spiral."

But Schrempp's global strategy has made progress on a smaller scale.

The world engine project for mid-sized cars, with an engine developed by Hyundai, is moving ahead. Smart and Mitsubishi are developing a three-cylinder unit with Nissan Motor Co. as a customer.

Mitsubishi also is selling the Raider pickup, which is based on the Dodge Dakota.

After 10 years, Schrempp is still asking investors to be patient. He emphasizes DaimlerChrysler's ability to fix problems, using as examples the turnarounds at Chrysler, truckmaker Freightliner and the company's aerospace units.

But the goal to be No. 1 globally seems much further away than when he merged Daimler-Benz and Chrysler Corp. into DaimlerChrysler.

Critics say the damage at Mercedes is deep and will be hard to repair.

Said Georg Stuerzer, an analyst at HypoVereinsbank in Munich: "The cost of fixing Mercedes' quality problems since the third quarter of 2004 is over 1 billion euros" ($1.30 billion).

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Latest I'd heard before this is that Mercedes is already trying to address the problems with their previous models by streamlining and simplifying the electronic components in all thier cars.

Also interesting about the amount of Maybachs they expected to sell in a year. 1000 seems really high when you consider the competing brands and ownership prospects, like Rolls-Royce, Bentley and... gee, I dunno, buying a yatch.

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Mitsubishi is in grave financial trouble. DCX was putting a lot of money into Mitsubishi and not getting much back.

the next Neon and PT Cruiser will be based on the Lancer. besides that (and the colt/forfour, which isnt sold here), DCX isnt collaborating with Mitsubishi anymore (hence why the Sebring and Stratus coupes are being cancelled when the new Eclipse comes out)

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Mercedes now weak link in DCX chain; chairman's dream to be No. 1 in jeopardy

JENS MEINERS | Automotive News Europe

Posted Date: 4/26/05

STUTTGART - Ten years after it began, Chairman Juergen Schrempp's effort to turn DaimlerChrysler AG into the world's No. 1 automaker is in trouble. But it's not Schrempp's add-ons that are foundering. It's the Mercedes-Benz crown jewel that has problems.

Critics say DaimlerChrysler should shed its vast structure and return to being Daimler-Benz. They challenge the ability of the company's managers to handle so many brands on a global scale.

Shareholders easily confirmed Schrempp's post at the April 6 annual meeting here, but professional fund managers joined a large faction of individual investors in criticizing the company's financial performance.

"One cylinder always seems to be working poorly," said Thomas Meier, fund manager at Union Investment in Germany.

DWS Investment fund manager Klaus Kaldemorgen mocked the company's method of fixing problems: "First you shoot yourself in the knee, and then you call the doctor."

Schrempp defends the performance of his company, which earned 2.5 billion euros, or about $3.23 billion at current exchange rates, in 2004 on sales of 142.1 billion euros.

In an interview with the German weekly Der Spiegel, Schrempp said that DaimlerChrysler "clearly" boosted profits in 2004, and that its balance sheet is "totally healthy."

"When you look at 2004 objectively, we developed well," he said.

Schrempp said the commercial vehicle division had the best result in its history. Financial services did extremely well, he said, and Chrysler boosted earnings by about $2.47 billion.

"Mercedes-Benz may not have its usual strength, but with an operating profit of 1.7 billion euros," or about $2.21 billion, he said, Mercedes is "still generating a result that pays back the cost of capital."

Global vision

Schrempp had envisioned adding North American and Asian legs to its Mercedes stronghold in Europe to build an empire with leadership in all three main global markets. With financial services and commercial vehicles, it was supposed to propel DaimlerChrysler past General Motors, Toyota Motor Corp. and Ford Motor Co.

By 2000, DaimlerChrysler had acquired Chrysler Corp. and purchased 37.3 percent of Japan's Mitsubishi Motors Corp. and 10.5 percent of Korean automaker Hyundai Motor Co. Revenue and profits that year were the highest in Schrempp's tenure.

Officially, Schrempp hasn't given up his vision. Last year he reconfirmed his goal to become the world's largest carmaker.

But after selling its equity positions in Mitsubishi and Hyundai, DaimlerChrysler no longer has an Asian leg in its global strategy.

This year other problems are more immediate, especially in the core Mercedes Car Group.

The ultraluxury Maybach brand is selling at half the expected volume.

DaimlerChrysler won't kill the entry-level Smart brand, but it will halt production of the Smart Roadster this year, and the Smart ForFour SUV is dead.

Quality slippage

The vaunted quality of Mercedes cars has fallen sharply, and so have global sales.

The quality issue surfaced first in various quality surveys and after the launch of the technically advanced E class in 2003. It then was reflected in slipping positions in customer-satisfaction polls.

Last summer DaimlerChrysler recalled 680,000 vehicles to fix the complex SBC electrohydraulic braking system. This month it had to recall 1.3 million vehicles to fix electronics and more braking problems - more than a year's total production.

"If you ask premium prices, you have to deliver premium quality," said Union Investment's Meier. In a recent Consumer Reports U.S. subscriber survey, the 2004 Mercedes-Benz E class was the most problem-ridden car. Among 2001 models, the C class was the worst car and the M class the worst SUV.

But the problems extend to Smart and Maybach. Smart, which has never been profitable and which DaimlerChrysler considered closing, will undergo a turnaround strategy that will cost $1.56 billion. Schrempp now promises the brand will break even in 2007, with a lineup reduced to the two-seat ForTwo and the larger ForFour model.

"Smart will be integrated where it makes sense, in areas such as aftersales and back office," said spokesman Heinz Gottwick. He said the company still is working on the full plan, which will be disclosed at the end of this month.

Analysts expect sharp cuts at Smart.

"Smart may be reduced to two model lines, integrated into the Mercedes-Benz structure instead of a separately run brand," one analyst said. "The question is what (Smart President) Ulrich Walker will do if he is turned into the equivalent of an A-Class or E-Class director."

Maybach sold 500 cars last year, just half of the 1,000 units it expected to sell annually.

Mercedes' partnership with British racing car specialist McLaren has cooled down. Mercedes car group CEO Eckhard Cordes killed the P8 project for a sister model to the SLR supercar. McLaren is continuing on its own.

The Chrysler group turned a profit in 2004, but it may be too soon to call it a turnaround success. Like with the PT Cruiser some years ago, Chrysler has a hit with the Chrysler 300 and Dodge Magnum. But its next-generation small and mid-sized cars, expected to be more conservative, may lose momentum.

Calling for patience

DaimlerChrysler's Asian strategy is in limbo after it divorced Mitsubishi and sold its shares in Hyundai last year. Privately, some Hyundai executives are glad DaimlerChrysler pulled out.

"DaimlerChrysler was not very successful with Chrysler and their other ventures," one said. "We certainly did not want to be pulled down that spiral."

But Schrempp's global strategy has made progress on a smaller scale.

The world engine project for mid-sized cars, with an engine developed by Hyundai, is moving ahead. Smart and Mitsubishi are developing a three-cylinder unit with Nissan Motor Co. as a customer.

Mitsubishi also is selling the Raider pickup, which is based on the Dodge Dakota.

After 10 years, Schrempp is still asking investors to be patient. He emphasizes DaimlerChrysler's ability to fix problems, using as examples the turnarounds at Chrysler, truckmaker Freightliner and the company's aerospace units.

But the goal to be No. 1 globally seems much further away than when he merged Daimler-Benz and Chrysler Corp. into DaimlerChrysler.

Critics say the damage at Mercedes is deep and will be hard to repair.

Said Georg Stuerzer, an analyst at HypoVereinsbank in Munich: "The cost of fixing Mercedes' quality problems since the third quarter of 2004 is over 1 billion euros" ($1.30 billion).